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Opportunistic rebalancing can enhance portfolio performance over time. Investors can miss opportunities by not rebalancing, but it’s possible to take it too far.

Rebalancing Strong ReturnsWhen capital markets turn more volatile, greater swings in asset prices can create both the need and opportunity to rebalance a portfolio consistent with one’s investment policy. However, investors may at times be hesitant to do so, fearing that stocks may have further to fall, particularly when the outlook is exceptionally uncertain. Our quantitative analysis of the last major downturn in stocks confirms that rebalancing can enhance portfolio performance, but it should be done judiciously.

Using market indexes, the chart above illustrates the incremental return achieved in a 60% equity/40% fixed-income portfolio using different rebalancing strategies during the period immediately before, through, and after the global financial crisis that ended in 2009. Notably, the frequency of rebalancing mattered, and could actually be detrimental if done too aggressively. Rebalancing when asset-class targets deviated 5% or more from their strategic targets yielded the best result. We would note that this analysis doesn’t reflect the impact of taxes or trading costs that should be considered, but still shows the value of rebalancing judiciously.

The lesson here is simple: Investors should rebalance opportunistically to enhance returns over a “buy, hold, and never rebalance” strategy. The other side of the story is also clear: the benefits of rebalancing can be lost if overdone.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

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